I’ve explained this to several people but so far not written about it! Writing about the local economy, it is easy to imply local economy means money is somehow ring-fenced to particular localities. The key thing to remember is money circulation is the key to local economies.
The wealth of any particular geographical area would be measured (if it is possible to measure it) as the flow of money through that area. Money accumulated is not a measure of wealth because accumulated money is not active. Whether it is in a shoebox under a bed or held in a bank account, inactive money does not contribute to local wealth.
Sometimes people use the leaky bucket as an analogy. The thing is you need the leaks. What matters is where the money flows out to and that the flow in at least matches or exceeds the flow out!
Money Circulation Tornado!
Think of a tornado. Air circulates in a column that narrows as it approaches the ground. If you look down on it from above, you would see a spiral of air currents if air currents were visible.
- So, money circulates locally, perhaps in a particular neighbourhood where there are businesses that support each other.
- Follow the spiral and the next turn might be a city. Many businesses at the neighbourhood level will also support businesses around the city. Money passes in and out of the original neighbourhood from and to the city. For example, a flour mill might supply flour to several bakers in neighbourhoods around the city.
- The next turn in the spiral might be the city region. Here several towns and cities might work together. The same flour mill might provide flour to bakers across the region and perhaps receive grain from the region.
- The next turn in the cycle might be the nation. Money circulates between regions. The big advantage they have is a single currency, so that money flows unimpeded.
- The next turn might be the global economy. Note this is true so long as money flows in and out of nations and does not accumulate in bank accounts.
This is certainly over-simplified but the point I want to make is the circulation is not solely around a neighbourhood but has to flow through other parts of the economy. In practice money will circulate in far more complex ways. It is impossible to map the flow of money but it may be possible to find out what blocks the flow.
Money can accumulate at any turn of the spiral. However, the further out you go, the more likely it is accumulation of money will damage the economy. However, there are some advantages to accumulation of finance. Finance can be used for large-scale infrastructure projects. These projects bring jobs and finance to local areas. This is usually described as investment.
There are generally two ways money accumulates.
The first is through taxation. The big advantage of taxation is use of money is to some degree transparent and accountable. Public sector finance creates jobs and supports the economy in local areas.
However, the trend in recent years has been to privatise public services. When local authorities use tax payers money to enter into long-term contracts, where voters are not permitted to see the terms and conditions of those contracts, they have sold their democratic accountability. I’ve never understood how large corporations can possibly be more efficient than public services; corporations pay shareholders and this is an additional cost.
The corporations are the second way in which capital accumulates. Even here the scale of the accumulation is important. A small developer who raises capital to build houses probably does little damage to the local economy. Indeed I suspect many such businesses are finding it harder to raise capital. Alternatively, a small landlord who buys property to rent may not be such good news.
How is Accumulated Capital Used?
It is worth asking what the wealthy spend their capital on. The reason finance is not easy to find for small businesses is because most of it is going into purchase of property. By property I mean things like houses and infrastructure but also shares in companies.
If you own stuff you control it. This is known as a rentier economy and the point is, it is an economy that has slipped the moorings of democratic control. What we need to understand is a rentier economy is an economy that is anti-business.
It is alarming to hear that production is declining. We’ve seen further closures of steel companies in recent weeks and this is a sure sign that financial transactions take precedence over transactions benefiting the whole community.
One of the biggest political lies is that opposition to accumulated wealth, or inequality, is the same as being anti-business. On the contrary, the City of London and similar, are the enemies of business. They take finance out of the economy and are not democratically accountable for the finance they own.
How do we redress the balance? Clearly, getting the right balance of accountable capital into the economy is important. One simple thing would be to abolish fractional reserve banking. This is where when banks make a loan, they do not have to match what they loan from their reserves. In effect every time a bank makes a loan, it creates money. This means the flow of money into the economy is not controlled by the state. (The link connects to Positive Money, a campaign against fractional reserve banking.)
If banks had to match their loans to their reserves, this would reduce the impact of finance on the economy. Whilst the volume of money in circulation would be reduced, so would inequality.
Of course, it is not as simple as that, it never is. My main point today is to underline the interests of the wealthy oppose the interests of local businesses. Those who oppose capitalism do no good if they oppose local business. The challenge is not to abolish capitalism so much as to find a capitalism that benefits everyone.